Setting up a Securitization Vehicle in Luxembourg - Damalion - Independent consulting firm.

Securitization involves the transformation of assets and/or risks into negotiable securities which can be placed under a special purpose vehicle (SPV) in Luxembourg. Securitizing risks and assets carries a host of benefits, including liquidity for institutional investors and/or initiators, the removal of debt or risks from previous balance sheets, and great potential for funding from investors in Luxembourg and other European Member states. 

Advantages of Luxembourg securitization vehicle

Securitization vehicles in Luxembourg are investment undertakings that offer highly-efficient and well-established options currently offered in the Grand Duchy. All securitization undertakings are subject to Luxembourg’s Securitization Act dated 22 March 2004, and may take the form of a securitization fund or securitization company. 

A securitization vehicle that wishes to take advantage of favourable legal and regulatory framework of Securitization Act must be domiciled in Luxembourg. A Luxembourg securitization structure may be structured a single tier or two-tier structure consisting of an acquisition vehicle and issuing vehicle. 

The Attractiveness of Luxembourg Securitization Undertakings Among Originators

A special purpose vehicle (SPV) in Luxembourg carries a host of benefits among fund managers and/or initiators:

  • Liquidity

Non-sellable assets with regular income stream may be established as a securitization vehicle, enhancing an initiator’s liquidity. 

  • Greater Access to Capital Markets

A securitization vehicle offers an initiator easy access to capital markets. A BBB-rated corporation that can securitize assets may be able acquire a AAA-rating. This transition allows corporations to access funds at a lower cost, including low capital cost for setting up a securitization vehicle in Luxembourg. 

  • Diversification of funding sources

Initiators can source assets from investors in the European Union. 

The Advantages of Luxembourg Securitization Undertakings Among Investors

  • Excellent  return on quality assets 

Investors may invest into high quality assets and yield better returns over time. It promises a more stable return based on the performance of acquired assets but not on the overall performance of a securitization company.

  • Combined risks and yields

Securities issued by a Luxembourg securitization vehicle come in various forms which pay different yields will largely depend maturity or risk exposure. Investors have the freedom to scale their investments based on their risk appetite. 

Why Invest in a Securitization Fund or Company in Luxembourg?

  • Luxembourg enacted the Securitization Law to offer a flexible and innovative legal framework for initiators and investors interested in cross-border transactions. 
  • Since the enactment of the Securitization Act in 2004, Luxembourg special purpose vehicles have been used for various Pan-European securitization undertakings.

As of May 2019, Luxembourg has tallied these statistics:

  • There are more than 1,350 securitization vehicles in the country
  • Within the 1,350 securitization vehicles, 6,000 compartments are domiciled in Luxembourg
  • The Grand Duchy is a popular jurisdiction for securitization structures, as evidenced by its 30% market share of all securitization vehicles in the European Union. 

The Benefits of Setting Up a Securitization Vehicle in Luxembourg

  • Various legal forms under the corporate or fund type structure.
  • Investors can choose between regulated and unregulated securitization special purpose vehicles.
  • As securitization vehicles are tax neutral by nature, they enjoy a more advantageous tax regime.
  • Opportunity to list issued securities on a stock exchange.
  • Excellent investor protection characteristics, as evidenced by limited recourse and remote bankruptcy provisions.
  • Under the Securitization Law, setting up sub-funds or compartments are permitted, enabling segregation of assets and ring-fencing activities.
  • Enforces limited recourse, non-seizure of assets, subordination, and no petition provisions, to name a few. 

Assets that can Be Securitized in Luxembourg

A Luxembourg securitization vehicle may securitize the following:

  • Claims
  • Movable and immovable assets 
  • Services performed by third parties, including residential and commercial mortgage loans, credit card receivables, trade receivables, corporate loans, debt securities, equity securities, financial contracts’ rights and claims, operation business’ rights and claims, and many more. 

It is important to note that under Luxembourg’s Securitization Law, there is no requirement for specific assets diversification. 

Financing of Securitizations in Luxembourg

Securitizations are financed through the issuance of securities- the value or return of which rely on securitized assets. In essence, securities refer to any type of debt and equity securities such as shares. 

Securities issued may be secured or unsecured, with securitization vehicles offering different securities specific to a specific compartment. 

Are Securitization Vehicles in Luxembourg Regulated or Unregulated?

Technically speaking, securitization funds and companies are unregulated structures provided they do not issue securities to the public on a continuous basis (at least three securities in a year). In case they issue securities past the limit, securitization companies or funds will be subject to Commission for the Supervision of the Financial Sector (CSSF) authorization and supervision. Finally, a securitization vehicle will be under the supervision of the Commission for the Supervision of the Financial Sector (CSSF)  when its total securities value is less than EUR 125,000. 

The activities of a Luxembourg securitization vehicle is limited to the administration of the flow of funds and their underlying securitizations. Therefore, a securitization vehicle in the Grand Duchy is not allowed to engage in active management. 

The Advantages of Luxembourg Securitization Compartments

One of the main selling points of a securitization vehicle in Luxembourg is its ability to set-up compartments quickly and at a low cost. 

  • Allows ring-fencing and segregation of assets and liabilities in a single compartment. 
  • A securitization company or fund may easily build a compartment upon approval of its board of directors. Compartment set-ups do not require approval from external offices. 
  • Each compartment within a Luxembourg securitization vehicle is treated as an independent entity without legal personality, which contributes to the cost-effective nature of setting up a new legal entity. 

Luxembourg Securitization Vehicle Legal Forms

  • Public Limited Company (S.A.)
  • Public Limited Liability Company (S.A.R.L.)
  • Partnership Limited by Shares (S.C.A.)
  • Cooperative organized as a public limited company (S.C.O.P)

Until 2016, the most popular securitization legal form was the public limited company. This legal form allows the securitization vehicle to offer securities to the general public- a transaction that is not allowed for S.A.R.Ls. Soon after, restrictions on the issuance of securities to the general public was removed for S.A.R.Ls in 2016. 

A securitization company set-up as a securitization fund must be managed by a management company established in Luxembourg. 

European Union Passporting Rights for Luxembourg Securitization Vehicles

Securitization vehicles do not benefit from EU passporting rights. Consequently, they are given the right to offer securities to the public and permission to facilitating trading on an EU-regulated market. An initiator of a securitization vehicle may obtain single passporting rights if it meets Prospectus Directive provisions. 

Set-Up Turnaround Period for Luxembourg Securitization Vehicles

The length of set-up depends on whether a securitization vehicle will be operating as a regulated or unregulated structure. The majority of securitization vehicles are unregulated and may be set-up in a matter of days. Drafting of a securitization vehicle’s documentations will be based on the complex structure and inputs of investors. 

Securitization Vehicles Set-up Costs

The set-up cost will largely depend on the types of services providers chosen by initiators of a securitization vehicle. Maintenance costs of the securitization vehicles is closer to the cost of a standard commercial company. A securitization vehicle may be an umbrella structure with multiple compartments with the ability to segregate investors’ assets without additional costs, except for costs related to auditing and accounting solutions. 

Leveraging our years of expertise in business consulting, we at Damalion stay committed to delivering dedicated support and superior customer service.  Consult with a Damalion expert today and we will discuss whether setting up a securitization vehicle in Luxembourg best suits your needs. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.